The Hannah Arendt Center has followed the shadow dance of the fiscal cliff less for its fiscal than for its political lessons. While a deal was struck, it is hard not to be impressed by the breakdown of our political class. Like the Europeans, we are now officially kicking the can down the road, refusing to address our meaningful problems. There is, in short, no political will and no political leadership with the courage and willingness to act in ways that might help us imagine a new way out of our predicament.
One could say it is the fault of voters. But there is a funny thing happening in politics. The House of Representatives, which is supposed to be the most populist of the major branches of government, is the one branch of government that is calling loudly for painful spending cuts and resisting the rise of our out-of-control debt. True the House is calling for tax cuts, but so too did the Senate and the President. What distinguishes the House now is its insistence on cutting spending. The Senate and President—imagined to be more protected from popular will—are instead combining now to cut taxes, increase spending, and keep the gravy train of government-subsidized stimulus flowing. In a strange way, it is the political body most responsive to voters that is at least calling for change—even if the House Republicans refuse to be honest about what those changes would be or what they would mean. Why or how has this political inversion happened?
One of the few Senators who voted against the compromise is Michael Bennett, the Democratic Senator from Colorado who was supposed to be cliff jumping in Vail (it’s nice here!) but stayed in Washington to vote “No.” Interviewed by Maureen Dowd in The New York Times, Bennett says: “Going over the cliff is a lousy choice and continuing to ignore the fiscal realities that we face is a lousy choice.” Bennett, a free thinking Democrat, knows that things have to change.
"The burden of proof has to shift from the people who want to change the system to the people who want to keep it the same,” he said. “I think if we can get people focused to do what we need to do to keep our kids from being stuck with this debt that they didn’t accrue, you might be surprised at how far we can move this conversation.
But what is it about the system that needs to change? Some see this as simply a matter of policy. Nouriel Roubini, writing today in the Financial Times, thinks taxes need to go up for all Americans to help support a welfare state that is drastically underfunded and yet ever-so necessary:
Neither Democrats nor Republicans recognise that maintaining a basic welfare state, which is right and necessary in our age of globalisation, rapid technological change and demographic pressure, implies higher taxes for the middle class as well as for the rich. A deal that extends unsustainable tax cuts for 98 per cent of Americans is therefore a pyrrhic victory for Mr. Obama.
Roubini may very well be right. But as he himself recognizes, the political will to exercise this transformation is simply not there. What that means policy wise, I do not know.
The after effects of Super-storm Sandy are felt from the beaches to the statehouses. First of all, let’s realize it was not a hurricane, but a freakish combination of storm systems. Super-storm is more truthful than hurricane. Whatever it was, it has upended lives, and politics.
The Financial Times reports today that Governor Chris Christie of New Jersey has now joined NY Governor Andrew Cuomo in requesting not only emergency aid to repair the damage caused by the storm, but also preventative money to build dunes, use eminent domain to purchase property, and generally re-engineer the New Jersey coastline.
The political transformation here is lost on few. As the FT writes:
Mr. Christie, a Republican, has previously sounded more skeptical than Mr. Cuomo, a Democrat, about using state powers to dictate how the state was rebuilt. But he said on Wednesday he might take away local towns’ power to grant “easements” to homeowners objecting to new dunes blocking their sea views and would not rule out using government powers to purchase properties it believed were in the wrong place.
“I have to protect the Jersey shore, both as an economic engine and as a cultural engine,” Mr. Christie said.
The desire to take away local powers and give them to states and to take away state powers and give them to the federal government is neither a democratic nor a republican idea anymore. While the party of the elephant may give lip service to local governance, it has rarely, if ever, backed that up with action. As is now well known, the federal government has grown as fast if not faster under Republican Presidents than it has under democratic.
Hannah Arendt argued that the greatest danger to freedom in the United States was the rise of a large and bureaucratic government. She worried, as she once wrote, that the true threat to freedom was the sheer size of America alongside the rise of a technocracy. The sheer size of the country combined with the rising bureaucracy threatened to swallow the love for freedom she saw as the potent core of American civic life.
Chris Christie and Andrew Cuomo may well be their respective parties’ nominees for President in 2016. They are both deeply popular and have taken a pragmatic and largely centrist approach to governing at a time of financial crisis and natural disaster. And yet, from an Arendtian angle, it is striking that both governors have so internalized the view that problems are to be solved by bureaucrats and technocrats rather than on a local level.
That the bureaucratic approach is so entrenched should not be a surprise. It is both a consequence of a further spur to the retreat from politics that Hannah Arendt describes. Even Christie’s insistence that he must save the Jersey shore as an economic engine shows the near complete victory of economic thinking over politics.
Does the President Matter? Consider this quotation from Jurek Martin in today's Financial times:
Barack Obama and Mitt Romney may speak, sometimes even to real audiences but more often to fat cat fundraisers, but their words fall on deaf ears if not empty wallets. Lots of people speak for them, in the strange languages known to advertising and political consultants, but what they say is ephemeral and leaves, beyond the daily news fix, “not a wrack behind”, as Shakespeare put it. Yet they are fueled by piles of money, which means they speak more and more – to lesser and lesser effect.
Lawrence Lessig is of course right to worry about the corrupting influence of money on our elections. But the greatest effect of all this money is the drowning out of meaningful speech in a throbbing sea of money-driven sound bites, consultant-approved platitudes, and poll-tested attacks. Everyone must stay on message, which means that no one says or does anything. In such a system, how can the President matter or make a difference in the world?
If you have an answer, enter our 2012 Thinking Challenge by answering the question: "How might the President Matter in the 21st Century?"
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Greece voted on Sunday and the headline account shows that the right of center moderates won. This was presented as good news, for it means a continued embrace of the Euro and years more of austerity. But there are other lessons to glean from the Greek election.
1. Extremism is rising quickly in Greece. As the Financial Times reports,
The parliament, for the first time in Greek history, will be full of extremists. Besides the neo-nazis and a Stalinist communist party there is Syriza, whose leader is a fan of Mao Zedong, Fidel Castro and Hugo Chávez. How did Greece, the birthplace of democracy, come to have a parliament full of hammers, sickles and swastikas?
2. The Greeks are being asked to suffer for years more, but with little or no hope in sight. Here is what the NY Times reports today, an opinion from one of the most knowledgeable commentators on the Greek crisis:
“Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bets,” he declared the day before Sunday’s Greek elections, irrespective of which party would win. “Greece will default because there is no other choice regardless of anyone’s politics.”
Almost all of the loans that Greece receives from Europe go directly to pay off the interest on loans to banks in Germany and elsewhere. Greece is neither paying down its debt nor investing in its future. The result is that the Greeks will suffer through years more of austerity and will likely be in no better position in a few years than they are now.
3. The combination of 1 and 2 above do not bode well for European politics in the coming years.
When Hannah Arendt looked to the Origins of Totalitarianism in the 20th century, she began her analysis with the financial speculation and subsequent crash of 1870. The ensuing crisis led to a weakening of nation-states and the rise of imperialism, all of which dissolved the traditional political and moral limits that had for centuries formed the structural foundation of European civilization.
As Europe struggles now to overcome national political limits as a response to the financial and banking crisis, it faces once again a political crisis mixed with an economic crisis. Europe is in trouble and they are not alone. But in Europe, unlike in the U.S. or in Japan, the financial crisis is inextricable from a crisis of nationalism and sovereignty. The potential for nationalist extremism on the one hand is real. On the other hand, there is also the potential for a weakening of national political traditions and the rise of technocratic and bureaucratic rule that, for all its rationalism, weakens moral and ethical restraints.
Public pensions are a mess. Ok, where is the hope? Yesterday Gillian Tett offered a rare glimmer of good news in a story about Rhode Island treasurer Gina Raimondo. But the good news comes with a bitter aftertaste.
Rhode Island is a small state, but it had one of the worst public pension deficits in the country. Forced to act, it has cut pensions for its workers, raised the retirement age from 62 to 67, and replaced the defined benefits pension (which guarantees a certain amount every year) with a partial defined contribution scheme (which pays out a pension based on how much the retiree has saved). These actions have angered many workers and unions, who are suing the state, but they have also saved the state pension system; one result is that the workers will be receiving some pension, even if it is less than they were promised.
The solution, as Raimondo articulates it, is above all to focus ruthlessly “on the math and facts, to come up with a solution.” Technocrats, not grandstanding idealists, are required.
The preference for technocrats over idealists illustrates a common approach to our extraordinary economic problems around the country: to hand over difficult political judgments to technicians. The same approach is leading the people to hand over the levels of government to technocrats in Greece, Italy, Suffolk County, and now Detroit. Dissatisfied with democratically elected leaders, the people are increasingly craving a government run by businessmen and accountants. It seems that the ruthless calculation of profit and loss is the last refuge of truth in our age.
It was Winston Churchill who said that democracy was the worst form of government, except for all the others. We have been living in passive agreement with Churchill's witticism for half a century. But slowly, harrowingly, fatalistically, people around the world are giving up on democracy.
Greece, the birthplace of democracy, and Italy (well, it's Italy) are now both governed by unelected technocratic governments charged with carrying out austerity programs that democratically elected leaders would not or could not bring about.
According to Gillian Tett, the Financial Times columnist, "the situation calls for very firm, forward-looking action that is almost impossible in a rowdy democratic political system at the moment." Tett is not alone in seeing the failure of democratic leadership in crises and the inability of democratic politicians to allocate pain and sacrifice amongst their constituents.
We in the United States are showing a similar predilection to trade democracy for technocratic management. Michigan is at the forefront of this trend. Governor Rick Snyder has been aggressive in appointing emergency managers to take control of city finances. In Pontiac, Flint, Benton Harbor and other Michigan cities, the mayors and town councils have been fired and rendered obsolete, replaced by a manager appointed by the governor.
In New York, Nassau County is now under the rule of an "oversight board" that controls its budget and finances. In Michigan, financial managers have the power to void labor contracts, privatize public services, and dismiss elected officials. These managers serve at the will of the governor, but they have no set term.
Tomorrow we may learn whether Detroit, Michigan's biggest and once proudest city, will also succumb to an emergency manager. The only alternative, it seems, is a consent decree with the State that will turn the city over to a manager jointly selected by the city and the state from a slate of candidates approved by the governor. The problem, once again, is that democratic governments have simply been unable to make the hard decisions needed. The result is that Detroit is bankrupt and in need of a state bailout and the state is treating Detroit like the spoiled child it is, just as the European Union treats Greece and Italy. Money will come, but only if the children agree to be treated like children.
I can only point out so many times that Wall Street bankers also acted like spoiled children, but they received their bailouts and undeserved bonuses without the demeaning financial oversight. Hypocrisy, however, is not an argument for or against such oversight, even if it does reveal that there are issues beyond simple economic calculation at play. In Europe, there are prejudices against the laziness of southern peoples, and here in the U.S. racial prejudices are no doubt active, as can be seen by one commentator's likening Detroit's citizens to addicts:
As those of us in surrounding communities watch the ongoing tragedy unfolding in Detroit, we really need to hope that this once great city can stop its decline, and begin to recover. But just like with an alcoholic, the city's so-called leaders must first admit they have a problem, and that they are unable to fix it on their own. Unfortunately, they do not appear to have reached that point yet. I guess a nice way of putting it would be to say that they are in denial.
Patronizing rhetoric aside, the basic problem is that the people of Detroit—like the people of Greece and Italy—are unwilling to govern themselves and are welcoming technocrats to take over that task. We witness once again how easily people will abandon democratic freedoms for the promise of a bailout. The current argument in Detroit is less about whether to give up self-government—a foregone conclusion—but how much money Detroit can extract in the deal for doing so.
The Romans had a provision in their law for the appointment of a dictator during emergencies, especially at war. A dictator, as Andreas Kalyvas reminds us, was not a tyrant. A dictator in Roman law was a 'temporary tyranny by consent' while a tyrant was a 'permanent dictator.' The Roman Republic recognized that crises required decisive action that a sprawling democracy was frequently unable to muster. The dictator was not illegal, but was a constitutionally approved office that was appointed for a set term, after which time power would revert back to the people. In other words, a dictator was a constitutionally regulated and democratically agreed upon safety valve for the failures of democracy.
Modern democracies have largely avoided such emergency powers, and for good reasons. It seems, however, that such resistance is fading. Will it be until we have no choice but to appoint an emergency financial manager to do the job we won't do for ourselves? But then again, who would appoint such a person?
For Hannah Arendt, this was and remains a crucial question. For human beings are political beings who actualize their freedom in public action with others. The entire premise of what Arendt once called the "dictatorial intervention" is to replace politics with the temporary tyranny of the educator. It is to admit our immaturity and call for a tyrant who will treat us as children. And yet that is, precisely, what it seems we want.
How big is the pension crisis in the United States? As I wrote last week, The Pew Charitable Trust has issued a report that there is a whopping $1 trillion dollar gap between the pensions promised to state public employees and the money that has been set aside to pay those pensions. But I also said that many people think that gap is actually much bigger.
The states' calculations assume a rosy 8% or even 10% return on their investments. The Pew report shows that even with those unrealistic assumptions, there will be a $1 trillion gap, since the states are underfunding their pension funds even based on optimistic returns.
Recently, Gillian Tett of the Financial Times talked to a few academics about the question and learned why the gap is actually $3-5 trillion dollars, and not simply $1 trillion. The basic problem is that low interest rates (now around 2%) mean that the investment on pension funds is not returning close to the hoped for amount. As Tett reports:
Thus academics, such as Joshua Rauh of Northwestern University, think that if a more realistic rate of return were used, this would reveal that state pension funds are now underfunded to the tune of $3tn-$4tn. Other observers are even gloomier. “This $4tn figure is a lower bound,” argues Robert Merton, economics professor at MIT. “Liabilities as reported by state and local governments seem to creep steadily up with each report due to ‘actuarial losses’ or overly generous assumptions about mortality and worker behaviour. In recent years, these have added growth of about 4-5 per cent per year to total liabilities.” And, of course, the longer that US interest rates – and bond yields – remain ultra low, the worse this underfunding gap becomes.
Tett's essay makes for a sobering read. As she rightly points out, this problem cannot be ducked forever. Remember, the 2009 bailout that President Obama pushed through was $900 billion, slightly under $1 trillion. We are talking about a shortfall in state budgets of $3-5 trillion in coming years. This is enormous and the effect on state governments and public services will be disastrous. But the very worst effect will be on all of those public employees who have been counting on contractually guaranteed pensions who will, I fear, learn what workers in Rhode Island and Alabama recently learned: such contractual guarantees don't mean much.
What does it mean to have a fact-based politics? This is a question that Hannah Arendt struggled with. First in her writings on totalitarianism, she saw that at the core of totalitarian regimes was the need to keep alive a coherent fantasy that motivated the mass movements supporting the regimes. When inconvenient facts appeared, they simply had to be eradicated.
Later, writing during the Vietnam war and in response to her book Eichmann in Jerusalem, Arendt argued that lies came to serve not totalitarian movements, but well-meaning idealists and technocrats who convinced not only others but even themselves that their lies were in the service of a winnable and noble cause.
Today we face the unraveling of a huge fiction. While the United States is still a wealthy country, we are not as wealthy as we have pretended to be over the last 15 years. But instead of addressing this self-deception, we are continuing to demand higher pensions and better medical care without actually asking who is going to pay for such services. It is a nice slogan to say that pensions and healthcare are human rights. But the current way we are achieving such human rights is by lying to ourselves, and, most pointedly, to the public employees who will see their promised pensions and healthcare evaporate during their retirement.
It would be nice if one of the Presidential candidates in either party would actually discuss the crisis in state pensions. But that would require courage and leadership, not to mention a willingness to have an honest conversation about the fact that this country continues to live beyond its means and promise benefits it cannot afford.
This week, Greg Smith announced his resignation as an executive from Goldman Sachs in a highly publicized Op-Ed piece for the New York Times, aptly titled “Why I am Leaving Goldman Sachs.” The letter describes a transformation in the “culture” of the giant investment firm that has gone from a business with integrity to one which is now “as toxic and destructive” as Smith has ever seen it during his twelve year tenure. “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Such behavior being tied to a Wall Street firm is not exactly surprising. And in Goldman's case, one wonders where Mr. Smith has been. In the last few years, a number of Goldman's clients have sued the bank, including ACA Financial Guaranty, Basis Capital, an Australian hedge fund, and ABP, a Dutch pension fund. Each argues that Goldman materially harmed them by selling them bad products. And Goldman already paid out $500 Million dollars to settle the Abacus case, in which Goldman was accused of illegally profiting by deceptively selling worthless paper to its customers.
There is a sense in which one looks at Mr. Smith's holier than thou revelation that Goldman was not the noble corporation he once thought it was and asks: really? Haven't you read anything Michael Lewis has written over the last 10 years? Not to mention Matt Taibi—the author of a take down of the mythic Goldman Sachs culture that was published two years ago.
Smith derides his former employer for focusing on profit above the well-being of the client. He puts this is stark business terms. He writes:
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
What Smith takes as a simple truth, is anything but. Trust is in short supply, and yet people work with Goldman and others because they believe that Goldman will make them money. As long as they think that Goldman will make them money, they don't really care that Goldman will make more money or that Goldman is looking out for itself. Clients continue to flock to Goldman because making money is what everyone cares about, not trust. One client of Goldman Sachs was even quoted as calling Smith “naïve” for believing that the business he is in was ever about anything but profit.
Frank Portnoy, writing in the Financial Times, argues that what is really at stake here is the definition of a client. Goldman is now a huge public firm with a few big clients it serves as advisors, and then thousands if not millions of smaller clients who simply buy its products. Goldman needs to have the trust of its major clients, but not is smaller ones. Just as Coca-Cola has an obligation to make sure that what it is selling is actually Coca-Cola, Goldman has a responsibility to sell you what it tells you it is selling you. But neither Coca-Cola nor Goldman are obligated to tell you that their products aren't healthy for your body or your wallet.
The Goldman myth is just that, at least today. After Goldman went public it transformed from a small investment bank with $1.4 billion in investments in 1998 to a huge corporation with investments of $13.96 billion in 2008, using a leverage ration of 26 percent. Does anyone really think that such a company is not driven by the bottom line?
Reconciling ourselves to reality—telling ourselves the truth—is one of the first demands of ethical life.
One such truth is that business today is very different than it used to be. One needs to confront and comprehend such a truth, especially if you want to resist it. And that is the problem with too many of the responses to Greg Smith's letter.
Yes, Smith seems naive and snarky. And why did he give us his resume at the end of his letter? He clearly has some issues. But the basic point he raises—that business should be conducted with some basic ethical standards beyond that of minimally following the letter of the law—is one worth discussing. There are some clients who want to work with bankers that treat them both kindly and respectfully, and they should know to avoid swimming with the sharks. And there is a real question whether pension funds and other institutions are sophisticated enough to swim in the waters with the likes of Goldman. And finally there is the worry that so many of our brightest young people want to work for firms at which the unmitigated search for profit—restrained only by the letter of the law—is the cultural demand. We need more discussions of such questions. So, as distasteful as I found Smith's letter, I must admit I am happy he published it.
A better airing of many of these same issues happened at the Hannah Arendt Center's 2009 Conference, The Intellectual Origins of the Financial Crisis. A number of our panelists touched precisely on this question of the cultural change in business and Wall Street in particular. The book of essays based on that conference will be published this year.
In the book is included an interview with Vincent Mai, at the time the Chairman and Partner of AEA Investors. In this interview, Mai offers an insiders' perspective on the cultural changes that the financial world has undergone. With more eloquence and also more awareness than Greg Smith, Mai offers an account of an inverted world, one in which trust, reputation, and respect have been replaced by a whole new set of values.
I don’t mean that everybody was a saint and today they’re all sinners. Far from it. But there was a set of ground rules that governed the way you did business which imposed a discipline which was central to the way Wall Street worked. It was the same in all the firms. And I’ve watched with a combination of fascination and horror at the way the world has changed, turned upside down.
Mai's story of the way the world of Wall St. has been turned upside down is fascinating reading, and worth more of your time than another 10 commentaries on Greg Smith. The book with Mai's interview won't be out for a few months still, but for now you can read it here. I recommend you do so for your weekend read.